Summary: In practice, there is a great difference in advertising productiveness between an upstream manufacturer and a downstream retailer. Such a difference plays a key role in the choice of distribution channel for the upstream manufacturer. In this paper, we study the effect of this advertising productiveness difference on the distribution channel selection by a manufacturer that can sell products either indirectly through a retailer or directly by establishing its own channel. Our results indicate that with high initial goodwill or with advertising productiveness that is not significantly low, the manufacturer should develop its own channel; otherwise, the manufacturer prefers the indirect channel. We also show that cooperative advertising improves the profitability of the indirect channel compared with non-cooperative advertising. Furthermore, the efficiency of the cooperative advertising programme can be improved by incorporating a negotiated subsidy rate strategy. In addition, a manufacturer with greater bargaining power is more willing to select the indirect channel.